Population Explosion in the Developing World

The problem of unemployment in developing countries during the past half century has been the result of a period of rapid but unbalanced development. The most obvious of these is rapid population growth, which resulted in the tripling of the world's population over the past seven decades. The world's population rose from about 2 billion in 1930 to 2.5 billion in 1950 and 6.6 billion in 2006, a growth of 164 percent. 1

This population explosion was itself the result of a dramatic improvement in human life expectancy around the world due to improvements in nutrition and health as a result of higher food production and the dissemination of medicines . The sudden and dramatic reduction in infant mortality and increase in life expectancy generated imbalances in developing societies, because they were not immediately accompanied by commensurate changes in reproductive behavior or proportionate expansion of education institutions and economic activity.

It has taken half a century for the main impact of the population explosion to gradually subside. Changes in reproductive behavior have brought down the birth rate in most parts of the world nearer to replacement levels .

Gradually educational systems in these countries have also been radically expanded to accommodate the surging size of the student age population .

Meanwhile, faster rates of economic growth, particularly in Asia have accelerated job creation to the point where it is matching or even outpacing growth of the labor force .

Lower birth rates, higher levels of education and training, and higher rates of economic growth are gradually restoring the balance between population and employment opportunities.

Demographic Revolution in OECD Countries

The world is now in the early stages of another demographic revolution, which promises to have tremendous impact on the future of employment worldwide. This revolution is the result of a steep and steady decline in the birth rate and an increase in life expectancy in the more economically advanced countries. Life expectancy in Western Europe rose from 47 years in 1900 to 67 years in 1950 and then to 79 years by 2004. 2

The result of these trends is a reduction in the number of young people entering the job market and a surge in the size of the elderly retired population. Already 50 percent of the population in industrialized countries is in the dependent age groups, which includes those under 15 and those over 64. 3During the past decade, the old-age dependency ratio in these countries has risen from 19 percent in 1995 to 22 percent in 2005. 4

The table below shows the projected growth of the working age population over the next five decades. It shows that the labor force in Europe will level off by 2010 and begin to decline there after. Already population growth has become negative in some parts of Europe .

Table 1.1 - Projected change in working age population, 1995-2050

These trends will have enormous impact on the future of employment.

Aging

The EU's labor force is expected to shrink by about 0.2 percent a year between 2000 and 2030. 5By 2030 there will be 110 million people over the age of 65 in the EU25, up from 71 million in 2000. This means that the old age dependency ratio - the percentage of people aged 65 and above compared to the number of people aged 15-64 - will increase from 23% in 2000 to 35% in 2025 and 45 to 50% in 2050. 6

As the old age population grows the working age population will shrink. By 2030 the working age population in the EU25 will stand at 280 million compared to 303 million today. The EU25 would lose an average of one million workers a year. By 2050, the over 60 years population in OECD countries will rise from 8% to 19% and the number of children will drop by 33% below today's level.

Projected Labor Shortages

A UN study released in March 2000 estimates that the 15 nation European Union would have to accept 170 million new immigrants over the next 25 years in order to maintain present levels of working and tax-paying population. 7A World Bank Study estimate that 68 million immigrants will be needed to meet labor requirements during the period from 2003-2050. 8This has prompted the EU to adopt a goal of raising labor force participation rates to 70%,while the average for the EU-15 was only 65 years in 2005

It has also spurred efforts to increase labor force participation of women. The overall female employment rate for the EU15 saw some welcome progress between 1997 (50.8%) and 2005 (59 %). But employment rates are around 17 percentage points lower for women than for men and the gap is nearly 30 percentage points in Greece, Spain and Italy. Denmark, Sweden and Finland are the only nations, which have a gender gap of less than 10 percentage points.

The UN estimates that Japan would need to admit 647,000 immigrants annually for the next 50 years in order to maintain the size of its working population at the 2000 level.9Significant labour shortages will develop in OECD countries unless immigration policies are dramatically liberalized or large numbers of manufacturing and service jobs are shifted overseas.

Other findings include

By 2013, labour-force growth in the United States will be zero. The US is forecast to have a shortage of 17 million working age people by 2020 .

But there is evidence that even in India, the surpluses may prove illusory. Reliable data on employment growth in India is confined to the formal sector which represents less than 10 percent of total jobs. Empirical evidence suggests actual job growth is far higher than official measures. Otherwise with seven million new job seekers entering the labor market each year, unemployment would have swelled enormously in recent years; whereas in fact both urban and rural employers report increasing difficulty attracting the workers they need. As indirect evidence of a tightening labor market in India, salary levels in the formal sector are rising at 14 percent annually and are projected to be the fastest rising in Asia. Wages in unskilled work in some non-metropolitan and rural parts of the country are rising even more rapidly.

Education and Skills

While fears of chronically high levels of unemployment begin to fade, firms are already experiencing a contrary phenomenon which promises to become increasingly common in future. Not a shortage of jobs, but a shortage of skilled workers. Employment in agriculture has been largely replaced by machinery. Low skilled manufacturing jobs have been largely exported to lower wage developing countries. At the same time, the demand for workers with higher levels of education, technical knowledge and skill has been rising rapidly. There is less demand for older workers who have not continued to upgrade their knowledge and skills. Educational institutions have responded slowly and inadequately to this change in demand.

Rising skill requirements combined with a shortage of skills is creating a growing mismatch between the skills of the workforce and the needs of the economy. Numerous studies confirm the existence of a substantial shortage of workers with the required level of skills to fill vacant positions. The USA is already suffering a shortfall of 126,000 nurses and estimates indicate a shortfall of 200,000 physicians and 400,000 nurses by 2020.111213Tool, die and machining manufacturers in the USA report that they are forced to invest in automated equipment because of their inability to recruit sufficient people even for high paying jobs in manufacturing. The National Association of Plumbing-Heating-Cooling Contractors in the USA says that 91 percent of member company owners rate finding qualified technicians as an important business issue. The lack of qualified human resources is the one obstacle holding back the nonresidential construction market. 14

The situation in Europe is similar. A study by International Data Corporation projects a shortfall in networking skills in Europe of 615,000 by 2008. 15

According to Klaus Zimmermann, head of the German Institute for Economic Research (DIW): "We need more immigration because we already have a dearth of skilled workers -- it's a problem that's going to become massively acute in the next 10 to 15 years." A more recent article dated June 14, 2007 in The Wall Street Journal reports that there are already 600,000 unfilled jobs in Germany, among them 48,000 missing engineers and other high-skilled jobs, which businesses are unable to fill. 16Another study estimated that 80 percent of small firms in Germany find it difficult to recruit the skilled people they require. In 2004, the Cologne Institute for Business Research (IW) projected that labor shortages will reach "alarming proportions" by 2050, by which time demographic changes are expected to reduce the labor force by 30 percent. 17

In Austria, 42 percent of enterprises report skilled-labor shortage. A UK study published in 2000 revealed significant skill shortages in a wide range of engineering professions as measured by the percentage of ‘hard to fill' job vacancies reported by firms.

Table 1:“Hard to fill vacancies” as a percentage of vacancies in engineering occupations across different business sectors. 18

It found that two-thirds of all vacancies at craft and skilled operative level are classified as hard-to-fill, as are over half of all vacancies at engineering professional level.19 This data is eight years old. It is very likely that the shortages are significantly higher today.

The technical skills shortage applies to jobs in every sector. Firms also find it difficult to recruit people with essential non-technical skills, especially basic interpersonal skills for selling, customer service and working in teams. Equipping job seekers with the types of skills firms are seeking can significantly accelerate job creation and business growth. Even in India, which produces 400,000 engineers annually, corporations are finding it increasingly difficult to find the qualified workers they require. India's National Association of Software Services Companies estimates a potential shortfall of 500,000 technology professionals by 2010. 20

The shortage of skills is closely linked to levels of education. As economies become more sophisticated and technologically complex, work demands a much higher and wider range of skills. The skills required are not merely physical or technical. Organization, interpersonal and managerial skills become far more important.

Research shows that the capacity of the work force to meet the requirement for skills is very closely correlated to levels of education. The level of educational attainment directly impacts on an individual's chances of finding a job. In Europe, the employment rate of low-skilled people stands at about 49%, compared to 83% for the high skilled. The gap exceeds 35 percentage points in Belgium, Italy, Ireland, Finland and the UK. The overall EU employment rate for low-skilled women is a strikingly low 37% in 2002 and in Italy the figure is as low as 27 %.

Summary of employment trends in OECD countries

Demographic, economic, technological, educational and social factors are combining to rapidly transform the employment landscape of OECD countries. The precise magnitude and speed of change is difficult to estimate, but the broad general directions and central issues have become much clearer over the past decade. These trends can be summarized as follows:

Growth of employment opportunities exceeds the rate of population growth and will continue to do so in future.

This trend has been accentuated until recently by the lowering of the retirement age, which has accelerated the loss of experienced workers from the workforce.

It has been further accentuated by falling birth rates, resulting in the influx of fewer young workers to replace those who retire.

The proportion of the population in retirement has also risen to peak levels and will continue to rise unless offset by massive immigration.

At the same time, educational and skill requirements have increased faster than the capabilities of the workforce.

All these factors combine to create an increasing shortage of skilled workers to meet the needs of OECD countries.

Policy Options

Governments and business in OECD countries are utilizing a variety of policy options to compensate for these trends.

An increase in the participation of women in the work force

Adoption of technological solutions to reduce dependence on labor

Greater outsourcing of manufacturing and service jobs to other countries.

Relaxation of immigration policies to increase the inflow of foreign workers to OECD countries.

Better utilization of the domestic work force.

All of these options will continue to play an important role in future. But the potentials of the last one have yet to be fully recognized and exploited.

Better utilization of the domestic work force.

Several options are available for improving the utilization of the domestic work force:

More education to raise the qualifications of young workers.

On-going training to upgrade skills to keep pace with changing needs.

Extension of the retirement age and removal of disincentives to work beyond the retirement age.

Policies and incentives to facilitate part-time work so that those who are unable or unwilling to work full-time can still participate in the work force.

All of these policy options need to be seriously pursued and all are being implemented or considered to varying degrees in some countries.

Aging of the Workforce

After working to reduce the age for retirement over the past five decades, OECD countries are now beginning to realize that actually they will have to reverse that trend for several reasons.

A surge in the size of the retired elderly places an increasing financial burden on the working age population, which is declining, in relative size .

Due to improved health and nutrition, older workers today are in far better health than people of comparable age in earlier generations. Therefore, forced retirement at a fixed age appears both arbitrary and unnecessary.

A growing skill shortage in OECD Countries will prompt governments and employers to extend the working age of their employees.

The Asia-Pacific region is already facing the crunch of a maturing workforce combined with a flat or falling birthrate.

In Australia, this trend is colliding with the relative unwillingness of older workers to stay in the workforce. Just 49 per cent of workers aged 55 to 64 work, compared to 59 per cent in the United States and up to 65 per cent in Scandinavia.

In Japan, with a population of 127 million today, over 33 million people are expected to surpass age 65 in the next decade. In China, the United Nations predicts 28 per cent will surpass 65 by 2040 - by which time it would have roughly 400 million senior citizens, more than the combined populations of France, Germany, Italy, Japan and the UK.

By contrast, India has - and will continue to possess - a large young workforce. By 2030, only 12 per cent of a swelling workforce of scientific, technical and professional will be above 60.

The aging of the population is leading to labor shortages, skills shortages and an increased tax burden on the working population in order to support and provide social benefits to the wider population. The proportion of adults over 60 in high-income countries is expected to increase from eight per cent to 19 per cent by 2050, while the number of children will drop by one third.

Aging Stimulates Migration

One result of these trends is increasing demand among OECD countries for the import of labor and for outsourcing of work to other parts of the world. Even if these governments rigorously promote policies to put more people into the job market (e.g. discouraging early retirement or improving child care facilities) this will not change the fact that their economies will become increasing dependent on migrant workers in the coming years.

In the year 2000, some 175 million people, about three percent of the world's population, lived outside their country of birth compared with 105 million in 1985 - more than at any other time in history. This represents a 67 per cent increase at a time when the total world population only increased by 26 per cent. Of these, 158 million are categorized as international immigrants and around 16 million as recognized refugees.

Migration is one of the mechanisms, which are working to reduce the vast divides, and inequalities that exist today between poor and rich, and between fettered and free. International migration is projected to remain high throughout the 21st century. The more developed regions will probably continue to receive international migrants, with an average net gain of about 2 million per year over the next 50 years.

More than a million permanent immigrants entered the US in 2001 and 2002, some 25% more than in 2000 . Migration for jobs increased significantly in 2001-2002 across all types of employment, particularly in the health sector, due to national labor shortages .

Migration for Employment

Migration is increasing between industrialized nations as well as from developing to industrialized countries. For example, more than 1.44 million graduates left Britain to look for higher paid jobs in US, Canada, Australia and EU compared to 1.26 million graduates that immigrated to UK in each of better jobs . One in six graduates in UK migrates compared to only one in 30 in France, which has the lowest migration rate among OECD countries .

The number of people from across the developing world who have at least some college education and live in an OECD country almost doubled, to about 12 million, from 1990 to 2000. Poor countries across Africa, Central America and the Caribbean are losing sometimes-staggering numbers of their college-educated workers to wealthy, industrialized democracies, according to a World Bank study made public today. Researchers found, for example, that a quarter to almost half of the college-educated nationals of Ghana, Mozambique, Kenya, Uganda, Nicaragua and El Salvador live in member countries. For Haiti and Jamaica, the number rises to more than 80 percent. In contrast, less than 5 percent of the skilled nationals of the great behemoths of the developing world - India, China, Indonesia and Brazil - live in a member country.

International medical graduates make up 23-28% of doctors in industrialized countries of which 40-75% come from low-income countries (9 of the highest emigration countries are in Subsahara and Caribbean). The health sector now employs 21% of all foreign workers in Norway, 19% in Sweden, 14% in the UK, 12% in the Netherlands and 11% in the United States .

World Bank study shows that inward remittances have helped to substantially reduce poverty in Mexico, Guatemala and Philippines. Romania now receives more than €5 billion annually as remittances from workers employed within the EU .

These inward remittances are just the leading edge of a reverse brain drain, which provides substantial benefits back to developing countries such as India, which receives more than $8 billion per year from its overseas diasporas.

Non-residents spur transfer of technology and business practices.

Non-residents spur growth of business back home.

Migration of talents overseas raises creates job opportunities in the domestic market, raises domestic salary scales and motivates people to upgrade their knowledge and skills.

In the next round, foreign companies extend their operations domestically to avail of local talent without moving them overseas.

Outsourcing

Outsourcing is a new word for an old phenomenon. It began on a large scale with the migration of manufacturing jobs to lower wage developing countries in the 1960s and 70s, when countries such as Singapore, Taiwan, South Korea became major manufacturing hubs for global corporations. It accelerated in the 1980s and 1990s when Philippines, Thailand, Indonesia, China and more recently India became major destinations for foreign investment in manufacturing for export .

But the advent of the Internet and the World Wide Web after 1995 have opened up a whole new dimension to outsourcing with wider implications for employment. Today the term mainly refers to the outsourcing of service jobs to workers in lower income countries. The enormous significance of this development lies in the fact that manufacturing represents less than 25% of jobs in most OECD countries , and even within the category of manufacturing a large percentage of the jobs are in the provision of services such as research, design, engineering, finance and marketing. Thus, total employment in the services probably represents more than 85 percent of all civilian employment in most countries. Of course, this category includes a large number of jobs that can only be done locally, such as sales clerks, restaurant and hotel staff and a large number of jobs that are presently done locally in education and health care but could potentially be delivered from a distance in future.

The advent of the high speed global computerized communications networks now makes it possible to outsource a wide range of jobs that were previously done locally such as design, research and engineering, publishing, customer service, technical support and some types of marketing.

Outsourcing first gained momentum in the IT industry where the shortage of skilled software professionals forced American companies to import qualified manpower from all over the world and later to move production facilities to foreign countries such as India where qualified manpower was in surplus. Since then it has spread from North America to Europe and other regions. Gartner has predicted that the global IT services spending will surpass $707 billion in 2007 .

From software outsourcing has migrated to business process outsourcing (BPO) in a wide range of fields including video game design, engineering, legal services, medical diagnosis, hospital management, accounting and financial services. European businesses have now farmed out so much work that they account for almost half of the global outsourcing business, worth a total of $198 billion last year, according to research firm IDC. The group forecasts it will grow by 65 percent to $322 billion by 2008. Leading Western companies like Phillips, GE, Accenture, DHL and Citibank opening outsourcing facilities in CEE (Czech Republic, Poland and Hungary). The breadth and complexity of this trend is illustrated by the fact that 4000 Hungarian companies in were operating in Romania in 2005. More than 600 IT companies in Lithuania now account for 7.5% of the country's GDP.

While reliable projections are difficult in a field that is evolving so rapidly, it has been estimated that by 2015, US companies will offshore 3.3 million jobs valued at $135 billion a year. Outsourcing by European companies is expected to double between 2004 and 2008 . India, China, Czech, Singapore, and Poland are the top destinations. A study by McKinsey projects that Poland will have 200,000 BPO jobs by 2008. BPO worldwide is expected to be a $25 industry by 2007 . European firms prefer nearshoring to countries in Eastern Europe such as Romania were wages are only 10% of the level in the West. More than 80% of world's top 2000 companies operate significant outsourcing operations overseas

Temporary Work

Another recent development has been a vast expansion in temporary and part-time workers. A Harvard study found that the increase in temporary workers was responsible for 50% of the reduction in unemployment achieved in the USA during the 1990s. It also found that in an age of high job turnover, temporary work is a bridge between jobs. Of those who were engaged in temporary work, 45% get permanent jobs within one year. Temporary work accounted for 11% of new jobs in EU during the 90s. Enabling legislation could create many more temp jobs. The number of part-time workers has also increased significantly in countries such as The Netherlands.